Koger Management Group, Inc. v. Continental Casualty Company et al, No. 1:2008cv00301 - Document 67 (E.D. Va. 2009)
Court Description: MEMORANDUM OPINION re: the Court's findings of fact and conclusions of law pursuant to Fed. R. Civ. P. 52(a). Signed by District Judge Leonie M. Brinkema on 3/3/09. (tfitz, )
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IN THE UNITED STATES DISTRICT COURT FOR THE EASTERN DISTRICT OF VIRGINIA . L 1 Alexandria Division KOGER MANAGEMENT GROUP, INC., in »-3 ) Plaintiff, CLL ' ¢ A; l>. ) V. ) CONTINENTAL CASUALTY CO. , et aL, 1:O8CV3O1 (LMB/JFA) ) Defendants. ) MEMORANDUM OPINION This Memorandum Opinion constitutes fact and conclusions of the Court's law pursuant to Fed. R. Civ. findings of P. 52(a) this dispute between an insured and its insurance companies. specific dispute centers on whether the defendant in The insurance companies may rescind the crime insurance policies issued to plaintiff because of an allegedly false statement made in the original insurance application. The defendants have stipulated that if they are not entitled to rescind the policies, they will pay plaintiff the $1,000,000 policy limit. I. Procedural Background Plaintiff, Roger Management Group, Inc. ("RMG"), filed a complaint against defendants, Continental Casualty Company and Continental {together Insurance Company "CNA"),1 seeking a 1 Continental Insurance Company issued the first policy covering 2003-2004 and also issued the renewed policy covering 2004-2007. Continental Casualty Company issued the renewal of the policy for 2007-2008. Continental Insurance Company is a wholly owned subsidiary of Continental Casualty Company. declaration that CNA was not entitled to rescind the crime insurance policies issued to KMG and that $1,000,000 policy limit pursuant policy.2 CNA filed a one-count declaration that it was counterclaim, liable for the insurance seeking a insurance issued in reliance on materially false information in the original application. Discussion A. Factual Background Robert Roger founded KMG and, it 2004-2007 entitled to rescind the policies because they were II. to the CNA was for 33 served as years. During this President of KMG, along with his wife, time, Robert Koger has which is a homeowners' management company operating in Virginia, Virginia, and the District of management activities, homeowners' "Clients' As part of KMG engaged in numerous activities on behalf of transactions, Columbia. Maryland, its clients. association. Accounts." owned continuously association West its financial To facilitate KMG opened a unique bank account has these for each KMG referred to these accounts as The operation of a client account was relatively straightforward: KMG opened the bank account, collected and deposited dues from the homeowner members of association into the account, and withdrew money from the account 2 KMG also sought attorneys' the Virginia Code, the claiming that deciding to rescind the policies. fees under Section 38.2-209 of CNA acted in bad faith in On August granted defendants' Motion for Partial plaintiff's claim for attorneys' fees. 19, 2008, this Court Summary Judgment on the to pay the association's vendors benefit of the association. or KMG's to make the Clients' A separate KMG employee, Accounts. generally hired its for accounting department the member dues and printed deposit slips associations. investments In addition, own accountant or checks each homeowners' its accepted for the Doug Stewart, to audit the reconciled association individual account. In approximately 2001, KMG if one of the association clients asked their homeowner members with credit cards or checking accounts. could pay their through automatic withdrawals To accommodate this fees from their increasingly popular payment arrangement, KMG set up a special "Transfer Account." This holding account association account called the account primarily functioned as a for credit card and automatic withdrawal payments until KMG transferred the payments into the specific client account for which the payment was intended. When a homeowner paid an association fee by credit card or automatic withdrawal, KMG the homeowner and deposited the first credit recorded the payment by card or automatic withdrawal payment Transfer Account. The funds would directly into then be moved out Transfer Account and deposited into KMG employees manually entered each To make due into a Robert Roger's Then, Jeffrey Koger, these homeowners' association account number and the amount spreadsheet. the the corresponding homeowners' association client account on a monthly basis. transfers, of the to that account son and the Chief Financial Officer of KMG, software uploaded that data into that directed an electronic transfer from the Transfer Account into the association account. transfers were made Koger was in and out of the Transfer Account, the only KMG employee who was electronic and did, During the entire time transfers.3 In addition, transfer funds out of those the Clients' Account into the for the association. The Insurance Policy Application As KMG's business grew, employees. the company expanded and hired more To protect against employee purchasing crime insurance KMG's insurance agent, crime to make Jeffrey Koger was able to, Transfer Account to facilitate purchases B. able Jeffrey theft, KMG began sometime in the mid-1990s. Tom Welch, insurance policy limit to In 2001, suggested that KMG increase its $1,000,000. Robert Koger followed this advice and completed a new application for crime insurance with the thought, In 2003, Insurance, Working through broker Ian H. crime Graham Welch recommended that KMG purchase a policy issued by 3 Disbursements checks that he that he reviewed the the Chubb Group stopped renewing its Robert Koger agreed, by checks. trial insurance application and its questions with Robert insurance policies. CNA. Welch testified at but did not specifically remember, 2001 crime Koger. Chubb Group. and a CNA application was sent to KMG. from the Transfer Account could also be made Although Robert Koger had the authority to draw on the account, make electronic only Jeffrey Koger had the authority to withdrawals. The application at issue Application" litigation was titled & Omissions "Property Managers Errors in this and Commercial Crime and served as an application for both crime insurance and errors and omissions coverage.4 Central to this litigation is Robert Koger' s answer5 to Question 5 on page 4 of the application, which asked: Are bank accounts reconciled by someone not authorized to deposit or withdraw therefrom? The application was marked "Yes" in response to this question. After receiving the application, Department approved the issuance of a policy, Insurance Company issued crime insurance to KMG for the period from May 1, policy had a $1,000,000 $10,000 deductible. May 1, crime to May 1, (Policy No. through May 1, It covered thefts of money, the policy was 2004 2003 that resulted in KMG renewed on the same 2007. No new application because the policy met the 1) 267876704) 2004. The subject to a securities, sustaining a terms insurance was required from KMG before renewal: and Continental limit per occurrence and was property by KMG employees In 2004, CNA's Underwriting and loss. for the period for commercial the 2004 renewal following criteria for automatic policy liability limit of no more than $1,000,000, 4 Crime insurance covers thefts of company property by employees, clients' and errors and omissions insurance covers thefts of property by employees. 5 Testimony at trial revealed that Jeffrey Koger actually completed the majority of the 2003 application, but the parties agree that Robert Koger reviewed the application and signed it on April 16, 2003. 2) total premium of submitted. After the policy was than $15,000, no claims on different initiated, the terms. KMG discovered that Jeffrey Koger had embezzled over $2,000,000 transferring and 3) rescission investigation was renewed for 2007-2008 In 2006, that he no more from the funds and his from Transfer Account by electronically the Transfer Account wife managed. These into bank accounts thefts went undetected for so long primarily because Jeffrey Koger was solely responsible for managing the Koger Transfer Account. submitted a claim 2004-2007 crime about loss the On April for approximately length of Upon it was entitled to rescind the learned that at and to deposit Clients' the material brought C. CNA asserted that false to enforce The Key Factual Defendants argue that to reconciled that from it. and this that KMG's learning more CNA CNA decided policies after it authority to reconcile the dual authority made the misrepresentation was initial decision to issue this suit with regards under into or withdraw from the Transfer Account and the to Question 5 to the crime least one person had dual Accounts. answer Robert time over which it occurred, began considering the possibility of rescission. that 2007, $1,000,000 insurance policy with CNA. and the 16, the policy. KMG the policy. Issue the answer to Question 5 was Transfer Account because Robert false Koger account and had authority to deposit and withdraw Plaintiff does not dispute that Robert Koger had such dual authority. Plaintiff, however, maintains that when Robert Koger answered Question 5 he believed the bank accounts it referred were the Clients' true. Defendants Account, respond but even if the Clients' Clients' that 2) 1) false as to Jeffrey Koger reconciled three Jeffrey Koger played a supervisory role over Clients' Accounts authority to make withdrawals; into Clients' Clients' the answer was also from which he had the authority to make reconciliations of deposit for which the answer was the Question included the Transfer it did not, Accounts because: Accounts withdrawals; Accounts, to which Accounts, and 3) from which he also had the all employees at KMG could so any employee who reconciled Accounts also had the authority to deposit into the accounts. III. Applicable Legal In Virginia, Standard an insurance company seeking rescission must clearly prove that a statement in the application was to the risk assumed and 2) However, when, as here, untrue. Va. Code Ann. the application also § 1) material 38.2-309. includes language requiring that the applicant attest to the truth of the statements to the best of his knowledge,6 must also clearly prove the insurance company that the answer was "knowingly false." 6 Page 5 of the April 2003 application stated, "[t]he undersigned declares that to the best of his/her knowledge the statements set forth herein are true and correct reasonable efforts have been made and that to obtain sufficient information from all of the insured Persons to facilitate the proper and accurate completion of this application for the proposed policy." Old Republic Life Ins. 1973); 1315 Parkerson v. (E.D. Va. applicant's of Co. Fed. 1992) .7 facts." this established law, to Bales. Home Life This "subjective the objective v. is a that statement was A. is was Co.. 854, 856 F. Supp. 797 subjective standard, (Va. but 1308, the Parkerson. 797 F. Supp. at 1317. succeed on a rescission claim, false, that the and that statement at the Under the issue was insured knew the false. Materiality KMG argued at material Ins. S.E.2d state of mind must be reasonable in light defendants must clearly prove material, 195 to the trial that issuance of the answer to Question 5 was not the original policy because there were discrepancies between CNA's underwriting guidelines and the application for crime insurance. KMG also argued that to Question 5 the was not material renewal policy because to issuance of the the answer 2004-2007 CNA automatically renewed the policy without requiring additional information from KMG. These arguments have no merit. Under Virginia law, insurance is material to a statement the in an application for risk assumed if it reasonably influenced the insurance company's decision to issue the policy. See Times Ins. 7 At trial, Co. v. Bishop. 425 S.E.2d 489, 492 (Va. 1993). At KMG argued that the terms of the policy required CNA to show that Robert Koger intended to defraud the company before it was entitled to rescission. This contention is unsupported by the terms of the policy and relevant caselaw. trial, Weston, CNA's Assistant Vice-President for Underwriting, Kay and the underwriter for KMG' s crime policies both testified that CNA would not have issued a crime policy to KMG in 2003 if Question 5 had been answered in the negative. explained that segregation of duties, inquired, They about which Question 5 protects against embezzlement and false deposits by employees. Specifically, duties had to be Weston testified that segregation of in place before a crime policy was issued. The testimony of the CNA witnesses clearly demonstrated that the answer to Question 5 reasonably influenced their decision to issue KMG's first crime policy in 2003. The answer to Question 5 also reasonably influenced CNA's decision to issue a renewal of that policy to KMG in 2004. Weston testified that CNA relied on the information in the original application in deciding whether to renew a policy. She stated that neither an original policy nor a renewal would have been issued if Roger answered Accordingly, "No" to Question 5. CNA clearly proved that the answer to Question 5 was material to its decision to issue the crime policies.8 B. Next, Falsity an insurance company seeking rescission must clearly prove that the insured answered a question on the application 8 At trial, defendants repeatedly referenced Jeffrey Roger's "verification" in August 2003. This so-called "verification" is irrelevant to the instant civil action because the verification was part of an application for Errors & Omission insurance, is not at issue here. which falsely. See Times asked whether Ins. Co.. "bank accounts" 425 S.E.2d at 491-92. Question 5 were reconciled by someone who was not authorized to deposit or withdraw from the accounts. Court finds Account that the answer because Robert "Yes" was Koger reconciled was authorized to withdraw from it false as Stewart to the Clients' time period he was accounts the Transfer and The answer was also the testimony of Doug solely responsible Accounts and that for in the 2003 also authorized to withdraw from these through electronic burden of to Transfer Account in 2003.9 Jeffrey Koger was the Clients' as the Accounts because established that reconciling three of false The clearly proving transfers. that the Therefore, answer CNA met to Question 5 its was false. C. Knowingly False In light of this finding, Robert Koger knowingly gave a understood it. As the Court must determine whether false answer to Question CNA correctly argues, 5 as he Robert Roger's subjective understanding of the question does not determine its meaning. His subjective understanding does, however, affect inquiry into whether he knowingly gave a false answer. Cf. Parkerson, the the 797 addressing the the terms of F. Supp. at 1317-18. "knowingly false" the question, but In the majority of standard, the insured understood arguably gave a false 9 Robert Koger also testified at trial that if accounts" correct in Question 5 answer based "bank did refer to the Transfer Account, answer would have been no. 10 cases the on the applicant's knowledge question. See, S.E.2d 169, however, e.g.. 172 (Va. 1967). The to cases the question, facts when he but rejecting, understanding of answer. 1954) its Cf. Cf. 797 F. the possibility that the question, Co. If the 1. Robert Supp. at 1318 the applicant it truthfully based on his v. Dansey, 81 S.E.2d 446, . . . .") 451 in the belief in (internal Robert Roger's Koger testified Interpretation of that Question 5 he misunderstood Question 5 believing that the phrase in the question referred to the Clients' Accounts, which included the Transfer Account. explained that he came to this conclusion because immediately preceding Question 5 to client-related matters. collection process asked about checks for Robert Koger was Specifically, Clients' He the questions Question 3 Accounts, asked about and Question 4 Accounts. a credible witness. 11 not in the application all referred for the Clients' the on "bank to KMG's own accounts, the (Va. omitted). the crime policy application, accounts" standard, he has not knowingly given a false truth will not avoid the policy and citations 154 insured ("[A]n incorrect statement innocently made quotations Echols. truthfully based on his Parkerson. but answers Sterling Ins. v. in which the applicant misunderstood the question at issue). misinterprets a question, Co. answered the "knowingly false" but answers understanding of the facts. (discussing, the Mutual of Omaha Ins. also applies misunderstands of His testimony explaining why he believed Question 5 referred to Clients' Accounts was plausible and consistent with other evidence record. Of particular significance is Robert Question 4 on the same page as Question 5, issuance. Question 4-b asked, all checks?" In response, countersignature was In fact, "Is Robert Roger's not answer to regarding check a countersignature Koger answered required on all checks that required on a in excess of $1000. the evidence established that a countersignature was required for checks over $1000 drawn from Clients' was in the required for checks of accounts. that Accounts, but amount drawn from KMG Robert Roger's answer to Question 4-b supports his assertion that he believed Question 5 addressed the Clients' Accounts. Additionally, was Robert Roger's misinterpretation of Question 5 not unreasonable. Evidence at trial similarly situated applicants had made answering Question 5. See Parkerson. demonstrated that other the 797 same mistake F. Supp. at in 1318 (considering it relevant whether an average person might misunderstand the question). RMG's insurance agent, Welch, testified that two of his other association management clients had also misunderstood Question 5 believing on CNA's accounts, not how they handled Thus, Roger was not Robert scope application, it asked about how they handled the homeowners' associations the company of Question their own accounts. the only applicant 5. 12 who misunderstood Moreover, imprecise. the wording of Question 5 The language of Question 5 specific accounts, accounts," for example, and neither are "all" or "every." crime insurance "bank accounts" and errors & omissions accounts), and it Question 5 is to the insurance from the about company's Koger that the own accounts) the clients' "accounts" the application, check issuance. evidence, the Question 5 the Court his answer to Question 5 it was that Question 5 referred Section IV of the properties the applicant Questions location of properties, the structure of the the managed by the undertakes in the next client-related activities: this coverage an application for (which insures For example, questions and activities those properties. of the is the included the is not entirely clear to which Accounts. application asks about which for Robert Koger to conclude Clients' applicant that of referencing. Furthermore, reasonable nature should have alerted Robert (which insures to "the insured's the applying, the application doubles as insurance itself modified by the words that question was asking about KMG accounts, both crime limit by asking about for which Roger was Transfer Account, confusing and does not Although CNA argued for KMG's own accounts, is section, in managing V, also ask coverage requested, the collection process for rents, and appears in Section V. concludes to relate Transfer Account. 13 that Robert to the Clients' On the basis Koger intended Accounts, not 2. At Jeffrey Koger Reconciled the trial, Question 5 OTA argued that even referred to the Clients' Accounts if Robert Accounts, Clients' Koger believed the answer was knowingly false because he knew that Jeffrey Koger reconciled three of the Clients' Accounts from which Jeffrey Koger was also authorized to make withdrawals. The evidence at that Robert Koger hired Doug Stewart Accounts. Although Stewart reconciled the Sequoia, accounts on his own, to reconcile testified that Ashburn Farm, he also the Clients' and Preswick association testified that Accounts on his own. showed Jeffrey Koger telling Robert Koger that Jeffrey Koger was the Clients' trial he did not recall reconciling any of He also stated that Robert Koger never indicated to him that he knew Jeffrey Koger was reconciling these accounts. not know Jeffrey Koger was Accounts of Koger testified that reconciling any of he did the Clients' on his own. However, April Robert 2003 the evidence at Jeffrey Koger reconciliations of trial also established that sometimes the other Clients' in assisted with Accounts. Stewart testified that when he had a problem with a reconciliation, would take not it resolve account. to his supervisor and that the issues, Two if his supervisor could Jeffrey Koger would reconcile other employees in KMG's Gray and Paulette Heiderman Wilson, accounting also the department, testified that, Meg in 2003, problems with reconciliations would ultimately go to Jeffrey 14 he Koger if Stewart or his Finally, resolve them. Robert Koger acknowledged he knew that Jeffrey Koger acted as a Thus, supervisor could not "back up" if there were problems with reconciliations. CNA demonstrated that Robert Koger reconciled the Clients' subordinates could not Koger was aware that Jeffrey Accounts if there were problems his solve. CNA also established that Jeffrey Koger was authorized to withdraw from the testified at Clients' trial transfers in 2003. that Jeffrey Koger was who knew the electronic therefore, Accounts code Robert Koger the only KMG employee for the Transfer Account, the only employee who could actually make electronic in and out of the Transfer Account. He also stated that Jeffrey Koger could and did transfer money out of Clients' Thus, the Accounts and into the Transfer Account on occasion. Robert Koger knew that Jeffrey Koger was withdraw from the On this Clients' record, answer to Question 5 Question 5, Robert reconciled Clients' was unable was and was, to Accounts in 2003. the defendants have was knowingly false. clearly proven that When he answered Accounts when Doug Stewart or his supervisor them. He also knew that Jeffrey Koger authorized to withdraw from the Clients' truthfully, the Koger knew that Jeffrey Koger sometimes reconcile though he may have authorized to believed he his awareness was of these 15 answering Accounts. the Even question two facts made his answer to Question 5 Echols. IV. knowingly 154 S.E.2d at false. See Parkerson. 797 F. Supp. at 1319; 171-72. Conclusion For the proved that forgoing reasons, favor. Entered this 3 Alexandria, Court the answer to Question 5 knowingly false when made. defendants' the finds was material, Therefore, the Court An appropriate Order will day of March, that CNA clearly false, finds in the issue. 2009. Virginia /s/ Leonie M. Brinkema United States District Judge 16 and
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